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Small-cap stocks could beat their large-cap counterparts in 2023, according to Jefferies. Equity strategist Steven DeSanctis said small-cap stocks have cheap relative valuations while volume has slid, high-yield spreads have tightened and cyclicals have been sold off. He said investors are incorrectly pivoting to secular growth in an attempt to follow the 2020 recession playbook. Expectations are low with poor sentiment for small caps, DeSanctis said. He noted that profits are forecasted to be down 17% in the first quarter, while the expectation for all of 2023 has been cut to -2.7%, which is worse than what’s predicted for large-cap stocks. Taken together with the attractive valuations, improving merger and acquisition landscape and better macroenvironment, he said he believes small caps will outperform in 2023. But small and mid-cap stocks have become a pool of “haves and have-nots,” DeSanctis said, with the best-performing quintile nearly 60 percentage points ahead of the worst in performance this year. That’s on top of the gap already seen between differing sizes and styles, he said. Given this varied landscape, DeSanctis screened for smaller-cap stocks that have lagged year to date but do well in Jefferies’ modeling. “The gap between the stocks that have had a strong showing vs. those that have been weak seems awfully wide at 60% through April 14,” he said in a note to clients Thursday. “We think there are many laggards that could bounce back, hence we looked for Buy rated names that also ranked well across our eight factor blocks.” Here are 10 names that made the list: Education stock Chegg has lost more than 26% this year. On Monday, the company announced CheggMate , the platform’s new artificial intelligence companion that was built with GPT-4. Craig-Hallum Capital analyst Alex Fuhrman upgraded the stock to buy from hold Thursday, noting the potential for upside from a positive inflection in enrollment trends. His price target of $25 implies the beat-down stock could rally more than 40% from Wednesday’s close. Webster Financial has slid 17% this year. The company just posted an underwhelming first-quarter earnings report. The company’s adjusted earnings per share of $1.49 was below the $1.57 consensus estimate of analysts polled by FactSet. Revenue also came in below expectations at $666 million against an estimate of $710.6 million. Fifth Third ‘s revenue narrowly missed analysts’ estimates, coming in at $2.21 billion compared to the $2.23 billion expected, according to Refinitiv. Shares are down 14% in 2023. LivaNova announced last week that Damien McDonald resigned, with the position being filed on an interim basis by board chair William Kozy. Mizuho Securities initiated coverage of the LivaNova at a neutral rating last week. The firm cited an upcoming catalyst for the stock in the form of an April/May readout from its Recover clinical trial using its Symmetry implant to treat unipolar and bipolar depression. Shares of LivaNova are down more than 10% in 2023. — CNBC’s Michael Bloom contributed to this report
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